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Monday, March 3, 2008

Ilargi: There’s such a storm of finance news this morning, it’s hard to choose. You’d think Warren Buffett saying on TV this morning that the US is in a recession would be big. But move over Warren, I’ll open with a long excerpt of Ambrose Evans-Pritchard’s excellent and devastating picture of global credit: "For the first time since this Greek tragedy began, I am now really frightened". And follow that up with the demise of Peloton, a lauded hedge fund one month ago, a dead duck today, and very much a harbinger of things to come: hedge funds, because of their highly leveraged nature, will tend to fall fast, sudden and hard.

The verdict is in. The Fed's emergency rate cuts in January have failed to halt the downward spiral towards a full-blown debt deflation. Much more drastic action will be needed. Yields on two-year US Treasuries plummeted to 1.63pc on Friday in a flight to safety, foretelling financial winter.

The debt markets are freezing ever deeper, a full eight months into the crunch. Contagion is spreading into the safest pockets of the US credit universe. It is hard to imagine a more plain-vanilla outfit than the Port Authority of New York and New Jersey, which manages bridges, bus terminals, and airports.

The authority is a public body, backed by the two states. Yet it had to pay 20pc rates in February after the near closure of the $330bn (£166m) "term-auction" market. It had originally expected to pay 4.3pc, but that was aeons ago in financial time."I never thought I would see anything like this in my life," said James Steele, an HSBC economist in New York.

No sane mortal needs to know what term-auction means, except that it too became a tool of the US credit alchemists. Banks briefly used the market as laboratory for conjuring long-term loans at Alan Greenspan's giveaway short-term rates. It has come unstuck. Next in line is the $45trillion derivatives market for credit default swaps (CDS). Last week, the spreads on high-yield US bonds vaulted to 718 basis points. The iTraxx Crossover index measuring corporate default risk in Europe smashed the 600 barrier. We are now far beyond the August spike.

Sub-prime debt is plumbing new depths. A-rated securities issued in early 2007 fell to a record 12.72pc of face value on Friday. The BBB tier fetched 10.42pc. The "toxic" tranches are worthless. Why won't it end? Because US house prices are in free fall. The Case-Shiller index for the 20 biggest cities dropped 9.1pc year-on-year in December. The annualised rate of fall was 18pc in the fourth quarter, and gathering speed. As the graph shows below, US households are only halfway through the tsunami of rate resets - 300 basis points upwards - on teaser loans.

The UK hedge fund Peloton Partners misjudged this fresh leg of the crunch. After an 87pc profit last year betting against sub-prime, it switched sides to play the rebound. Last week it had to liquidate a $2bn fund. Like many, Peloton thought Fed rate cuts from 5.25pc to 3pc (with more to come) would end the panic. But this is not a normal downturn, subject to normal recovery. Leverage is too extreme. Bank capital is too eroded. Monetary traction eludes the Fed. An "Austrian" purge is under way.

UBS says the cost of the credit debacle will reach $600bn. "Leveraged risk is a cancer in this market." Try $1trillion, says New York professor Nouriel Roubini.

Contagion is moving up the ladder to prime mortgages, commercial property, home equity loans, car loans, credit cards and student loans. We have not even begun Wave Two: the British, Club Med, East European, and Antipodean house busts. As the once unthinkable unfolds, the leaders of global finance dither. The Europeans are frozen in the headlights: trembling before a false inflation; cowed by an atavistic Bundesbank; waiting passively for the Atlantic storm to hit.[.]

Ultimately the big guns have the means to stop descent into an economic Ice Age. But will they act in time? "We are becoming increasingly concerned that the authorities in the world do not get it," said Bernard Connolly, global strategist at Banque AIG. "The extent of de-leveraging involves a wholesale destruction of credit. The risk is that the 'shadow banking system' completely collapses," he said.

For the first time since this Greek tragedy began, I am now really frightened.

Ilargi: Let's do a repeat update, shall we? We do not have a subprime crisis, we have an overall credit crisis. And if a bank near you, wherever you are, says they have little exposure to subprime, that means nothing at all. There are very few banks who have not invested in bad debt products. Very little. You'd probably have to go look in Potterville, 1940-something, to find one. Hundreds, if not thousands, of banks, all over the world, will go twiddely-up soon, no matter how brave the faces are they put up. That goes for the Arab world too.

Gulf banks have been forced to writedown an additional $1.5 billion in mortgage related losses as the extent of region’s exposure to the subprime crisis becomes more apparent, according to the Middle East Economic Digest (Meed).

Gulf International Bank (GIB) was the worst hit of the GCC-controlled banks and was forced to take $1 billion in provisions to match the massive writedown incurred as a result to exposure to risky, mortgage-related assets. Arab Banking Corporation and Gulf Investment were also forced to take additional provisions of $230 million and $246 million respectively to cover subprime-related losses.

The three banks losses constitute three-quarters of the total writedowns in the region attributable to mortgage related assets, according to Meed. Ratings agency Standard & Poor’s recently warned that Gulf banks might be concealing the extent of losses relating to the US subprime mortgage crisis.

A survey of 20 regional banks last year indicated losses might be restricted to less that 1% of total assets, although dips in the portfolio value of some banks late in the year suggest exposure could be much larger.

The mortgage meltdown has sent the hedge fund crashing to earth, leaving its founders ‘gobsmacked’ – and a lot poorer

The sumptuous, Turkish-style low sofas in Peloton’s Soho office provided little comfort to the hedge fund’s founders, Ron Beller and Geoff Grant, last week. After six sleepless nights spent trying to pull together a rescue deal, the two former Goldman Sachs bankers announced on Thursday night that they had been left with no option but to launch a fire sale of Peloton’s flagship $2 billion (£1 billion) ABS Master Fund to pay off their bank loans.

It was a sudden bump back to earth. Only a month earlier, the same fund had been crowned the “New Fund of the Year” at the Eurohedge industry awards. Peloton’s strategy of betting that US sub-prime mortgages would fall in value had clocked up gains of 87% over 2007. US-born Beller accepted the award with a rousing message of thanks to his team for convincing him that “the sub-prime emperor had no clothes”.

Now it is Beller who has been stripped naked, losing half of his estimated $80m personal fortune through the fund’s collapse.He is fast becoming the poster boy for a crisis of confidence that threatens to engulf more of London’s hedge-fund industry.“These guys had a good reputation,” says one rival credit-fund manager. “If Ron Beller has got into trouble, then anyone can get into trouble.”[..]

In the first few weeks of the year, Beller began to receive twitchy calls from his bankers. With the value of the assets he held in his portfolio in free fall, the banks were tightening his credit terms. They were also demanding that the fund should put up more collateral to support its positions. To meet these new terms, Beller began to sell some of the AAA mortgages in his portfolio.

But the calls kept coming, with the financing conditions getting ever tighter. And all the time, the value of the portfolio was diving. The spreads on Peloton’s portfolio are estimated to have doubled over January, then doubled again in the first two weeks of February. Every time the spreads widened, Peloton had to put more cash with its prime brokers.

Goldman Sachs, Bear Stearns, Deutsche Bank, UBS, Merrill Lynch, Morgan Stanley and Lehman Brothers were among those with lending lines into the firm. They were getting increasingly nervous about the positions.

The housing slump is a drag on the U.S. economy. The slowdown is spilling into the furniture, auto and home-improvement industries. Furniture sales fell more than 8 percent in 2007 from a year ago. Sales of the Ford F-150, one of the most popular trucks used by contractors, decreased 13.2 percent last year. Builders and subcontractors have scaled back on workloads.

Skilled tradesmen are the first to feel the effects. Landscapers, among the last, are braced for a slow spring season. Electrical contractor Dick Humphrey ran 20 crews a day, each with an electrician and an apprentice. He is down to 12 crews now, doubling up on electricians and letting the helpers go. "I had to lay off my first crews a year ago in February," said Humphrey, who owns Humphrey Electric Co. Inc. in Midlothian. "It was very tough.

"When I lay off a crew, that's two people who aren't paying taxes. They may or may not be drawing unemployment." It's two tradesmen competing for work at other companies. It's two people who probably aren't buying cars or furniture -- and who may not be taking their families out for pizza. Restaurant operators point to the economy as their biggest challenge, according to the National Restaurant Association. Its monthly index, which tracks the health of and outlook for the industry, declined for the fourth consecutive month in December.

The housing slowdown has knocked more than 1 percent off the overall economy, which crawled at 0.6 percent in the fourth quarter. Growth in the 3 percent to 3.5 percent range is considered healthy. "Last year was the worst in the furniture industry since 1982," said furniture analyst Jerry Epperson with Mann, Armistead & Epperson, an investment-banking firm in Richmond. "About 20 percent of all furniture sales typically are from moving from one house to another," Epperson said. With people staying in their houses, they are not buying as much furniture.

Industry shakeouts include the closing in late 2006 of Storehouse Furniture, which had 70 stores, including seven in Virginia.Nationwide Mattress and Furniture Warehouse, which has a store here, is going out of business. Holladay House Furniture, which has a store on West Broad Street and one in Aylett, has filed for bankruptcy. Lowe's Cos. Inc. and Home Depot Inc. reported sales at stores open at least a year fell 5.1 percent and 6.7 percent respectively last year. In a slow housing market, fewer people need to put up shelves and curtains and do the home-improvement tinkering that comes with moving into a home.

Ilargi: I don't always agree with Mish (just mostly!!), but he's certainly dead on here, on cash AND on gold. Yes, gold is good, but only if you can afford to hang on to it for a few years (even if you lose your job and your home value drops 75%). In the meantime, it will be used to pay margin calls AND to dupe suckers who get in at the wrong time.

For years people have been telling me that there is no difference between money and credit. This [margin call] action proves otherwise. When things are liquid, money and credit "look" the same. It's all an illusion. For starters, credit can (and is) is being withdrawn, even against hard assets.

And unlike credit on bank balance sheets, cash in the bank may be "worth less" tomorrow but it is extremely unlikely to be "worthless" tomorrow. As banks and brokerages are scrambling for more cash, hedge funds and others are getting migraines trying to produce that cash. By now it should be plain to see: Liquidity is a coward. It runs away at the first sign of trouble. Cash however, is hoarded in times of trouble. Cash, not credit, is king. It's important to understand the difference.

Finally, Gold is the ultimate form of cash. It represents a true flight to quality. Gold is the only money that is not someone's liability. It's no wonder that gold has been soaring. However, to the extent that hedge funds may be over leveraged in gold (or commodities in general), a sharp pullback could easily be coming. One possible trigger might be an across the board margin hike on all commodity futures.

Excessive leverage everywhere needs to be unwound, and it will be. Those expecting more margin call migraines will not be disappointed.

The dollar declined to a record low against the euro on speculation the slumping U.S. economy will cause banks to report more losses from the collapse of the subprime-mortgage market. The currency fell for a fifth straight day, dropping below 103 yen for the first time since January 2005, and touched the weakest since the euro's 1999 debut. Dollar declines also came as a report showed U.S. manufacturing contracted for a second time in three months.

The currency pared its losses as the Standard & Poor's 500 Index climbed, reversing an early drop. "Negative prospects for global markets and the global economy further precipitated the sharp decline in the dollar" against the yen, said Samarjit Shankar, director of global strategy for the foreign exchange group in Boston at Bank of New York Mellon. "We are seeing risk aversion across the board."

The yen gained versus about half the 16 most-traded currencies as credit-market losses prompted investors to reduce holdings of higher-yielding assets financed with loans from Japan, a strategy dubbed the carry trade. The yen advanced 0.3 percent to 13.2096 per rand. "The dollar is in a clear free-fall, down versus every major and emerging-market currency," Jan Loeys, head of global- market strategy at JPMorgan Chase & Co. in London, wrote in a note to clients.

Japanese consumer finance firm Takefuji Corp. said today it may report losses of as much as 30 billion yen ($289 million) on subprime-related derivatives transactions. The yen advanced to 156.87 per euro from 157.46. "Risk aversion is clearly the dominant theme in the market and that's punishing the dollar," said Michael Klawitter, a currency analyst in Frankfurt at Dresdner Kleinwort, the investment bank owned by Allianz SE, Europe's biggest insurer. "We're in an environment of plummeting equities and soaring default protection costs."

After suffering a beating from their exposure to home loans, banks and securities firms are about to take their lumps from office towers, hotels and other commercial real estate. And the losses could last longer than those from the subprime shakeout. As the economy wobbles and financing costs rise because of the credit crunch, commercial-real-estate values are starting to slide, with analysts at Goldman Sachs Group Inc. projecting a decline of 21% to 26% in the next two years.

That means misery for securities firms with exposure to commercial-real-estate loans and commercial- mortgage-backed securities. William Tanona, a Goldman analyst, expects total write-downs of $7.2 billion by Bear Stearns Cos., Citigroup Inc., J.P. Morgan Chase & Co., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Morgan Stanley in the first quarter. Those firms had combined commercial-real-estate exposure of $141 billion at the end of the fourth quarter.

A team of Goldman analysts predicts the financial damage from commercial real estate could last as long as two years, which would mean "a significantly longer tail than subprime." That is because only 28% of commercial-real-estate loans have been packaged into securities since 1995, while about 80% of subprime loans have been securitized; the higher level of securitization subjects the subprime assets to more-immediate mark-to-market accounting, which is playing out in the form of the write-downs that are dominating headlines.

Wall Street has set itself up for a hard fall in commercial real estate. Banks and securities firms are facing exposure from loans and financing commitments made on commercial-real-estate projects, property they own directly and commercial-mortgage-backed securities that no one wants to buy.

Ilargi: Oh geez, what a surprise. Canada’s economy is not all tha tgreat. Canada will cut rates tomorrow, condemning the loonie to the same fate as the US dollar.

Canada's economy slowed to a crawl at the end of 2007, as factories cut production amid weaker demand from the U.S. and other markets abroad. Gross domestic product grew at an annual rate of 0.8 per cent over the final three months of last year, the slowest since the 0.5 per cent pace in the second quarter of 2003, Statistics Canada reported Monday. GDP advanced at an annual rate of 3 per cent in the third quarter.

The Canadian economy advanced 0.3 per cent in October, sputtered to a 0.1 per cent gain in November and collapsed in December, contracting 0.7 per cent. Factory production dropped 3.7 per cent in the month to its lowest level since December 2001. Canada's central bank had predicted an annual growth rate of 1.5 per cent in the fourth quarter, and the consensus estimate of Bay Street economists was about 1 per cent. The latest GDP report comes as Bank of Canada policy makers meet to reset interest rates, and the weaker-than-expected result may induce them slash borrowing costs.

“We think that today's softer than expected GDP result is the final nail in the coffin for a 50 [basis point] rate cut from the Bank of Canada tomorrow,” said TD Securities economics strategist Jacqui Douglas. “With further rate cuts clearly needed to insure against the downside risks from a rapidly softening U.S. economy, and since monetary policy acts with a lag, we see no reason for the Bank of Canada to wait.”

U.S. states and local governments may extend the worst slump in municipal bonds on record as they replace as much as $166 billion of auction-rate securities. California, Boston's biggest hospital and Duke Energy Corp. are converting their bonds to other types of tax-exempt debt after auction failures drove rates as high as 20 percent. The potential supply equals almost 40 percent of the municipal securities sold last year, overwhelming a market that tumbled 4.9 percent last month, according to indexes maintained by Merrill Lynch & Co., which began compiling market data in 1989.

Rates increased last month as investors shunned the securities on concern the insurers that guaranteed the debt may be downgraded, and as dealers refused to buy bonds that went unsold at auctions. The higher borrowing costs are squeezing states and towns just as slowing growth threatens to cut revenue. "It's a supply tsunami," said Robert Fuller, principal of Capital Markets Management LLC in Hopewell, New Jersey, a financial adviser to municipalities. "All of that is going to be redone, and it's going to be redone fast," he said of auction-rate bonds.

Twenty-one states face budget deficits in fiscal 2009, including 16 that are short at least a combined $30 billion, according to the Washington-based Center on Budget and Policy Priorities.

Standard & Poor's slashed the ratings on $3.2 billion of debt issued by Jefferson County, Alabama, to below investment grade on Feb. 29, citing costs from auction-rate and other bonds and interest-rate swaps used to finance its sewer system. "The county can provide no assurance that net revenues from the sewer system will be sufficient to permit the county to meet the interest rate and amortization requirements of the liquidity facilities," officials said in a notice last week.

A complex system of credit ratings and insurance policies that Wall Street uses to set prices for municipal bonds makes borrowing needlessly expensive for many localities, some officials say. States and cities have begun to fight back, saying they can no longer afford the status quo given the slackening economy and recent market turmoil.

Municipal bonds, often considered among the safest investments, sank along with stocks last week, darkening the already grim mood in the markets. Several big hedge funds unloaded bonds as banks further tightened credit to contain the damage from mounting losses on home mortgages and other loans. States and cities rarely dishonor their debts. The bonds they sell to investors are generally tax-free and much safer than those issued by corporations. But some officials complain that ratings firms assign municipal borrowers low credit scores compared with corporations.

Taxpayers ultimately pay the price, the officials say, in the form of higher fees and interest costs on public debt. “Taxpayers are paying billions of dollars in increased costs because of the dual standard used by the rating bureaus,” said Bill Lockyer, treasurer of California, who is leading a nationwide campaign to change the way the bonds are rated. California, one of the largest issuers of municipal bonds, is rated A; Mr. Lockyer said the state should be triple A.

The state is soliciting support from other municipalities for a letter it intends to send to the ratings agencies, arguing that municipal bonds should be rated on the same scale as the one used for corporate bonds. Because of their relatively weak credit scores, more than half of all municipal borrowers buy insurance policies that safeguard their bonds in the unlikely event that they fail to pay the debt. California, for instance, paid $102 million to insure more than $9 billion in general obligation debt between 2003 and 2007.

Mounting losses in Countrywide's mortgage portfolio are putting the completion of its takeover by Bank of America in question. In Countrywide's 10K, filed last Friday, the company detailed the abysmal performance of option adjustable-rate mortgages, or Option ARMs. Option ARMs allow borrowers to choose between monthly payment options, the lowest of which result in principal being added to the balance of the loan, known as negative amortization.

Option ARMs more than 90 days delinquent increased to 5.4%, up 900% from a year ago. In Countrywide's $28 billion Option ARM portfolio, 71% of borrowers are only making the minimum payment and 80% of the loans did not require borrowers to verify their income. $87 billion of the company's entire mortgage portfolio is backed by loans in either California or Florida

The Wall Street Journal notes higher than expected losses on home equity loans have forced loan servicers to trap repayments to protect bond investors. Countrywide is obligated to continue advancing borrowers' requested funds, further pressuring its capital position. The firm claims this situation was "deemed remote" until late 2007, and that its "maximum obligation cannot be defined."

Countrywide's already shedding assets, likely beginning with its REO portfolio of thousands of bank owned properties. The true value of REO assets is widely unknown, and forced selling may cause banks like Washington Mutual that hold vast quantities of this paper to incur additional losses.

Never in her 20 years in the property market has Heidi Mueller been so much in demand. As one of the leading foreclosure and short sales agents in the San Francisco property market, she is the first person you go to when you can't afford your mortgage payments and need to sell your home, fast.

As the sub-prime crisis reaches its climax, she has barely had a moment to stop. "This year is the vintage of 2005," she says. "Last year everyone that came in had bought in 2004. Just like clockwork: three years go by, then the teaser rates go and," she gestures towards the door of her real estate office, "in they come."

This is the front line of the sub-prime maelstrom and the biggest crisis in US property for decades. With an economic earthquake shuddering through the American housing market, prices have already fallen by around 10pc nationwide. Appropriately enough, one of the major epicentres runs along the San Andreas Fault. By January, California had the biggest number of properties facing default and foreclosure in the US - at just over 57,158 more than double the equivalent figure from last year.

U.S. stock futures pointed to further declines Monday after stocks in Asia posted big losses overnight.Asian stocks sank amid gloom over sluggish economic growth in the United States and rising inflation at home. Tokyo's benchmark Nikkei 225 slid 610.84 points, or 4.5%, to 12,992.18. A rising yen clobbered the shares of exporters such as Honda (down nearly 6%), Toyota (down more than 3%) and Sony (more than 4%).

Hong Kong's Hang Seng index dropped 746.7 points, or 3.1%, to 23,584.97. South Korea's Kospi index lost 2.3%. Stocks also fell in Singapore, Indonesia, Vietnam, Malaysia and the Philippines. The carnage Monday followed a 316-point, 2.5%, drop in the Dow Jones industrial average Friday "We took our cue from the United States," says Song Seng Wun, regional economist at the CIMB-GK investment firm in Singapore.

Asian investors are worried the U.S. economy — buffeted by a meltdown in housing prices and the subprime mortgage market — will tilt into recession. Song notes that Singapore — a tiny city-state with an economy built on global trade — is especially vulnerable to an economic downturn in the United States. Adding to the uncertainty: Surging food and energy costs have sent inflation rocketing to the highest levels in a quarter century in some Asian countries.

Billionaire investor Warren Buffett said on Monday the U.S. economy is in recession and "stocks are not cheap." Speaking on CNBC television, Buffett also said he is no longer offering to guarantee $800 billion of municipal bonds backed by MBIA Inc, Ambac Financial Group Inc and FGIC Corp, three large bond insurers.

Buffett said that "from a common-sense standpoint right now, we're in a recession," though the U.S. economy has not yet recorded two straight quarters of declining gross domestic product, a traditional indicator of recession. He said the environment is "nothing like '73 or '74 yet," referring to a deep economic downturn also marked by rising oil prices, higher inflation and falling stocks.

Still, he said investors should not rule out a significant economic downturn, and that Federal Reserve Chairman Ben Bernanke has a "very tough balancing act" in trying to boost economic growth without kindling inflation. Buffett said there is a fair chance that inflation may ignite in a "serious way."

Warren Buffett said rating agencies should be affected for a long time by recent events, but it will be difficult for his Berkshire Hathaway Inc holding company to lighten up on its interest in Moody's because of the large size of its stake.

Buffett, speaking on CNBC, also said that he might buy a stake in another domestic drug company. Berkshire Hathaway owns shares of Johnson & Johnson .

European banks, unlike their U.S. counterparts, borrowed heavily from other banks to fund a spurt in lending to companies in the run-up to a global credit crunch, the Bank for International Settlements said. The scale of borrowing may have exacerbated the credit crisis as banks scrambled to roll over short term-funding when liquidity started to dry up over the summer. Net borrowing by European banks from other banks, including uncollateralised loans and repo financing, has soared to $800 billion from practically nil in 1997, the BIS said in a quarterly review.

In contrast, U.S. banks have borrowed in dollars from companies other than banks and channelled these funds to other banks through the interbank market. By the end of September 2007 total lending by U.S. banks to other banks had shot up to $442 billion from virtually nothing in 1999. "These diverging positions of U.S. and European banks suggest that the latter face relatively large U.S. dollar funding requirements, which may help in understanding the liquidity squeeze in the interbank market during the second half of 2007," said the BIS.

While European banks may have hedged their risks, the build-up in interbank borrowing to fund dollar lending to companies "may have required a frequency of rollovers in the interbank market that became difficult to maintain as market tensions increased," said the BIS report.

Sawmills are shutting down across the province -- some sporadically, some for good. The situation isn't likely to improve any time soon

Almost 10,000 British Columbia forest sector workers are out of jobs as sawmills respond to the collapse lumber demand in the U.S. by cutting production and sending people home. From Fort Nelson to Vancouver Island, mills are closing their doors, cutting back on shifts, operating sporadically or implementing job-sharing to get their costs down.

A Vancouver Sun survey of companies that have announced layoffs since January 2007 shows 34 mills are down either permanently or indefinitely. Twenty-three have curtailed shifts or introduced job-sharing. The cost in jobs lost, both permanent and temporary, has climbed to 9,597. The shutdowns are often sporadic, with mills re-evaluating start-up week-by-week. But most companies say they see nothing on the horizon to encourage them to restart.

"We are bringing our costs down but the problem is the market is dropping faster than our ability to get our costs down," said Canfor's Shepard, explaining how Canfor lost $199 million in 2007. "This is a situation that I have never witnessed before and in speaking with my colleagues in the industry it's nothing they have witnessed either. We are dealing with a tsunami here." Canfor alone has shed almost 1,000 jobs in the last year.

Most CEOs are expecting markets to remain depressed until mid- to late 2009. By then, the B.C. forest industry will be in the hands of fewer players, with the small, independent sawmills being devoured by larger, integrated companies, further concentrating the ownership of sawmills and timber tenures in fewer hands. "Only those with very deep pockets can survive a significant downturn of two years or longer in duration," said John Elmsley, president of Prince George lumber company Winton Global, which is currently shut down.

HSBC signalled that it was prepared to sell off peripheral assets today as booming annual profits were hit by a $17.2 billion (£8.7 billion) writedown on bad debts and credit losses driven by its embattled American operation. Douglas Flint, the finance director, declined to be drawn on specific divisions that HSBC would be prepared to sell. "There would be a number of businesses at the periphery of what we do; if somebody thought they were worth more than we do then we would clearly consider that," Mr Flint said.

HSBC has come under pressure from some shareholders, including Knight Vinke, the activist fund, to offload its American division, which accounted for $11 billion of today's writedowns following huge exposure to the downturn in the United States housing market, particularly in sub-prime mortgages. HSBC paid about $14 billion to buy Household, a sub-prime specialist lender in the US, in 2002, but it has dramatically scaled back its presence in the country, effectively ending underwriting in the middle of last year and cutting the branch network from 1,300 to about 1,000.

Mr Flint highlighted the bank's plan to redeploy capital into emerging markets, where greater opportunities had been identified. The writedowns, which had been well-flagged by the bank, threatened to cast a pall over a 10 per cent increase in full-year group pre-tax profit to $24.2 billion.

Operating income and earnings per share were all up healthily and the annual dividend was bumped up by more than 11 per cent to $0.90 a share. The cost efficiency ratio also improved, rising to 49.4 per cent, despite operating expenses soaring by 16 per cent.

Stephen Green, chairman of the bank, which employs 330,000 worldwide, bemoaned the "extraordinary strain" that had been put on the world's financial system by the credit crunch. "Our North American results continue to be adversely affected by high loan impairment charges as we respond to the impact on our portfolio of credit deterioration arising largely from housing market weakness in the US," Mr Green said.

HSBC has reiterated its shifting focus towards emerging markets, by announcing yesterday that it is selling its regional French banking division for €2.1 billion (£1.6 billion). Britain’s biggest bank has entered exclusive negotiations with Banque Populaire, the French mutual, after it made a firm cash offer for the 400-branch business.

The assets comprise seven regional banks in the southern half of the country, including Société Marseillaise de Crédit, Banque de Savoie, Banque Chaix and Banque Marze. HSBC acquired the businesses, which are run semi-autonomously and do not carry the HSBC brand, when it bought CCF, the banking group, in 2000.

Several other bidders, including CIC and BNP Paribas, are thought to have taken a look at the business, which achieved a price tag of 21 times profits and 3.7 times shareholders’ equity.Stephen Green, chairman of HSBC, said: “This is an opportunity to redeploy capital to other investments as we rebalance our activities towards emerging markets and faster-growing business segments.”

Market regulators and investors came under fire from MPs today for their part in sparking last year's global financial credit crisis by being seduced by short-term gain at the expense of potentially catastrophic risks. The Commons Treasury Select Committee criticised the Financial Services Authority (FSA) and the Bank of England for failing to ensure companies addressed serious risks within their businesses.

Describing financial products as “ludicrously complex”, the report stated: “The complexity of structured financial products and the risk that top management have insufficient understanding of such products was brought home forcefully to us by the inability of Lord Aldington, chairman of Deutsche Bank UK, when appearing before the committee to explain what a CDO-squared was, despite the fact that Deutsche Bank is involved in the CDO market.”

Banks and investors, such as pension and hedge funds, wrote down billions of dollars last year after the value of their investments in asset-backed securities plunged because of a wave of defaults on the underlying American sub-prime mortgages. Mr McFall says that the “best and brightest at our top investment banks have expended great energy designing ludicrously complex financial instruments, which you need a Nobel Prize in physics to understand”.

In a move that escalates the legal trouble faced by the mortgage lender, the Countrywide Financial Corporation, federal regulators have asked the courts to sanction the company for abusing the bankruptcy system.United States trustees in Florida, Georgia and Ohio have asked the courts to enjoin “Countrywide’s sustained bad faith conduct” in its treatment of distressed consumers trying to save their homes in bankruptcy court, according to a complaint filed by a United States Trustee Donald F. Walton.

“Countrywide’s failure to ensure the accuracy of its claims and pleadings has resulted in an abuse of the bankruptcy process,” Mr. Walton, the trustee for the region that includes Atlanta, wrote in papers filed Thursday in the Federal Bankruptcy Court for the Northern District of Georgia.

The action by an arm of the Department of Justice marks a rare concerted effort by the government to rein in Countrywide for behavior that has exasperated consumer attorneys for years: Misapplied mortgage payments, false court filings and unexplained extra fees. “This is the first case that I know of where the U.S. trustee has actually filed an adversary proceeding in bankruptcy court against a creditor of this type,” said O. Max Gardner III, a consumer bankruptcy lawyer in North Carolina. ”The relief that it is asking for is based on a long pattern and practice of behavior that is all too familiar.”

In “9 out of 10” Chapter 13 bankruptcy cases, wage earner bankruptcies where people try to catch up on their bills, Countrywide complicates court proceedings with erroneous legal filings, mishandled payments and fees that are not explained, Mr. Walton said. “The thing that’s different now is that we’re finally getting people who should be interested, the U.S. trustee, involved in it,” Mr. Gardner said.

As the United States has become an older nation, reverse mortgages have grown into a $20-billion-a-year industry, with elderly homeowners taking out more than 132,000 such loans in 2007, an increase of more than 270 percent from two years earlier. In surveys, many borrowers say reverse mortgages have improved their lives and provided money they needed for retirement.

But hundreds of people who have sought reverse mortgages — in lawsuits, surveys and conversations with elder-care advocates — have complained about high-pressure or unethical sales tactics they say steered them toward loans with very high fees. Some say they were tricked into putting proceeds of their loans into unprofitable investments, while sales agents pocketed rich commissions.

“Every scam artist is getting into this business,” said Prescott Cole, an elder-care advocate who has worked with numerous reverse mortgage borrowers. “Because reverse mortgages are so complicated and give you money up front, years can pass before a senior realizes they’ve lost everything.”

The paralysis in the credit market has arisen from the failure of that most fundamental tenet of banking: trust.Reestablishing the trust that investors had in the world’s leading banking centres will not come easily. Institutions’ measures of goodness have been shaken to their foundations.

A key expression of that trust was found in the faith placed on the judgments delivered by the credit-rating agencies. They were trusted commentators on the fundamental credit risk of companies, shares and bonds. But with the evidence that is now available, it could be argued that those agencies are fundamentally flawed and maybe even dangerous in a global financial system.

First, let’s examine the incentives that drive the behaviour of ratings agencies. Who pays for the agencies’ commentary?If you were buying a house and wanted to be sure that it was sound, you would pay a surveyor to assess it. You would expect that buyers of bonds and shares in the financial world would pay the credit-ratings agencies to assess the soundness of the instruments they are going to buy. You would be wrong. In the highly paid financial-services world, the organisation selling a credit risk pays for the rating.

Imagine the outcry if a lawyer from whom you sought advice on a contract were to be selected and paid by the other person in the contract, even though it is you whom he is advising. That would be unthinkable. But it has been perfectly acceptable for an organisation selling billions of dollars of credit risk to select and pay the agency that does the rating - on the basis of which that risk is then sold into the market

Thornburg Mortg announces additional margin calls of approximately $270 mln; says it has not met the majority of its most recent margin calls Co announced that since February 28, 2008, the filing date of its 10-K Annual Report, the co has been subject to additional margin calls of approximately $270 mln on its reverse repurchase agreement borrowings outstanding as of February 29, 2008.

The co has not met the majority of its most recent margin calls, but it is working to meet all of its outstanding margin calls within a time frame acceptable to its lenders by either selling portfolio securities or raising additional debt or equity capital. These margin calls are strictly the result of continued deterioration of prices of mortgage-backed securities precipitated by difficult market conditions, but are not a reflection of the credit performance or long-term realizable value of Thornburg Mortgage's high quality portfolio, which continues to remain exceptional. As of February 27, 2008, TMA had met all margin calls, including margin calls received between February 14 and February 27, 2008, in an amount in excess of $300 mln, on our reverse repurchase agreements, the substantial majority of which were related to the decline in valuations on our super senior mortgage securities backed by Alt-A mortgage loans.

The co is currently in default with one reverse repurchase agreement counterparty and is working with that lender to repay the debt and the lender has not yet exercised its right to liquidate pledged collateral.

A delegation from the U.S. Treasury Department met recently with a few of the world's largest sovereign wealth funds. They want to avoid a political firestorm as more and more foreign investment makes its way into the U.S. economy. What's this all about, really?

Over the past thirty years, the U.S. government has dismantled the system of regulation the nation instituted to prevent the sort of wild speculation that preceded the financial meltdown of the Great Depression. The last piece to fall was known as the Glass-Steagall Act, a Depression-era firewall intended to separate commercial banking from investment banking. In the late 1990s, my cabinet colleague Bob Rubin joined Fed chair Alan Greenspan to get Congress to repeal Glass-Steagall.

Now we're witnessing another financial meltdown, also fueled by speculation. Hopefully this one is not as serious as the one that occurred in 1929. But it does require us to rethink the importance of sensible financial regulation. Perhaps the pendulum of financial deregulation has swung too far. Paradoxically, the primary response of governments -- both here in the US and in other advanced nations whose financial markets are also frozen -- isn't to rethink regulation. It's to subject financial institutions to government ownership.

Recently the British government decided to take over the troubled mortgage lender Northern Rock. This was after the Bank of England was forced to give the firm emergency funding to avoid a run on the bank. Well, you might say, that's Europe. They've been nationalizing companies for years. But the same trend is happening in the United States. The difference is that here it's not the US government that's taking over financial institutions. It's governments from Asia and the Middle East.

Singapore recently paid $4.4 billion for an ownership stake in Merrill Lynch. The Chinese bought a $5 billion piece of Morgan Stanley. Abu Dubai is spending billions on other American financial institutions. The list of foreign owners continues to lengthen, and the amount they're shelling out to buy American banks continues to grow.

As their balance sheets weaken, America's big financial houses are getting bailed out by selling out. It's only logical, from their viewpoint. American banks need the cash and oil-producing and East-Asian governments have it. Yet there's no end in sight for the credit crisis, and Middle Eastern and East Asian "sovereign wealth funds" are in the process of owning a larger and larger portion of the global banking system. These funds are growing by more than a trillion dollars a year. At this rate, they'll BE the global banking system.

The problem is, government ownership doesn't work. Governments are lousy at deciding where profits can be found. They're liable to make decisions based on politics rather than profits. It's the biggest irony in financial history. Decades of U.S. government deregulation of Wall Street has reaped a whirlwind of irresponsible speculation. It's now ending in a financial meltdown that's being remedied by government ownership, with all the strings that come with government ownership. And it's not even OUR government that's holding the strings.

18 comments:

Shibbly
said...

Illargi,Family and friends say the same old thing.... Housing prices may fall,but they always go up. The stockmarket may fall, but it always goesup in the long run. No one I know (except for may 1 or 2 people) would entertain the thought of a downward turn in lifestyle. You mentioned to get your money out of the system. Do you mean to cash out of investments and bank accounts, and stash cash under the mattress?

Silver gold, for the longer term. Government bonds for the short term (30 days if possible). and just plain cash. Other than that, purchase things that are useful in a downturn. Land, water, tools, seeds, ways to heat.

People's minds work just like the economic system (this makes them so ideal for each other): one way only, no reverse. that is a large part of the problem.

No-one entertains the downturn idea because they have an inbuilt aversion to it. And then it comes anyway.

Ambrose-Pritchard does not get it. He still believes the "big guns" can turn the ship around. How? By inflating? By giving away "capital"? You cannot give away capital. You can decrease the value of cash by inflating but this credit contraction is so large that we'd need hyperinflation to get past it.

He's afraid for the first time? Gee, welcome to the club, Ambrose-Pritchard!

Funny you mention it, since I was just rereading that bit. Ambrose is what I would call a right-swinging dreidel, for lack of a better term, if there be one.

That said, he has access to tons of data that we don't, and this article is quite something to come out of that part -right swinging- of the press, even if it's just England.

I put it where it is, as the opener of this Rattle, because, if you take away his biased conclusions, he paints a very good portrait, in my view, of what today looks like, complete with the numbers that should make many people understand that same portrait.

There are simply not many writers as clear and concise AND complete as he is these days. And I for one am willing to look beyond his particular worldview in order to absorb what he has to offer in clean data.

But surely you are very right, and it's valuable that you do so, to point out where he draws strange conclusions. It can still be rectified, if only...... Yeah.

I note that margin calls are increasing now and because of this all this "toxic" waste that companies tried to keep hidden is coming into the market. They tried to hide it because if exposed to the plain light of day in the open market, the value would shrivel up and die.

Please note what Ambrose-Pritchard did say about this toxic paper: "Sub-prime debt is plumbing new depths. A-rated securities issued in early 2007 fell to a record 12.72pc of face value on Friday. The BBB tier fetched 10.42pc. The "toxic" tranches are worthless."

So now the margin calls are forcing the trash out into the open market. What does this mean? It means you can take Citigroup's "asset" column and divide it by 10 to get some notion of Citigroup's real assets. Try that and then look at Citigroup's liabilities. Try that for any of the major banks out there where you can get asset and liability information.

In my own blog today I wrote:

Why is this important? Because the horsemen of the apocalypse are still riding our direction. Peak oil is not taking a break. Global grain reserves are about to reach the lowest level since 1947. Climate change is accelerating. And now our economic system is coming apart right when we need social and economic stability to confront multiple global problems. If you can't see where this is going, then you shouldn't be reading this blog.

Our civilization stands at the doors to hell itself and refuses to turn away.

You and Stoneleigh recommend gold and cash as well as land, food, etc. I agree with that but may I humbly recommend guns as well? Pray that you never need them but if you do, all the land, gold, and cash in the world won't replace one good firearm in skilled hands.

I prefer a peaceful world. Given a bleak assessment for the future I can forsee a time when the choice will be take a bullet or give a bullet. I'm joining a gun club to get a pistol license, if I was in the USA I'd also be shopping around for Teflon coated FMJ's.The city I am in will be one of the last western cities to fall, as long as our water supply holds out. May those with gentle intelligence survive to seed the new world

I'm a pacifist, a gentle fellow. Unfortunately I see a very bleak future and one where the dispossessed get mob angry. If it comes down to taking a bullet or giving one, well, creation gave me a strong will to survive. I'm joining a gun club and getting a license for a hand gun.The way things are going, well might have to get a lot of Teflon coated FMJ's.

Sounds like the people I'm trying desperately to save. Maybe if you tell them that it took the DJIA 25 years after the 1929 crash to get back up to its previous high? I fear the brainwashing has been so complete that most ordinary people will only exit their equity positions AFTER suffering catastrophic financial losses. My baby boomer parents-in-law have only experienced things getting better their whole lives. That they won't attempt to understand history or, failing that, take my word for it, is going to be their loss. I just hope they don't think they're moving in with my family!

Ambrose Evans-Pritchard is the rightwingnutjob who was Obsessed with proving Bill Clinton murdered his top aid Vince Foster.

As regards his economic opinion, well, even a blind horse occasionally finds a carrot. The ReThuglicans and the Gory Torys are in Large part responsible for denying Peak Oil and Peak Climate and Peak Finance. They only 'wake-up' to the subjects when they might lose money.

As an old expression goes,'Conservatives' don't want to conserve Anything exception their own bank accounts and their daughters virginity.

Your blog is the first link in my blog roll, ilargi. And I mentioned you in my next to current post. What do you want, egg in your beer? :P

To several others:

I was going to write a long reply about guns but there is no point anymore. Those that refuse to own them will get exactly what they deserve, and frankly, it's far too late to worry about converting people when the models point to less than 500 million surviving homo sapiens by 2100.

I would say about the gold thing, keep a little it might work a lot better than a gun in a sticky situation. If a situation arises, that can't be talked around or run from, then I would prefer a knife . It has quite a few advantages over a gun in close-in disputes and an even better use in that you can divide bread with a knife, ever try doing that well with a gun, unless of course you have the gun... oh dear am I defeating my argument here. Anyway if one wants to own a really good gun then maybe a nail gun, it has great leverage in the building of that new life business.